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December 07, 2023
SGH Insight
On a final note, there is a good deal of interest as always on the GDP target for 2024 that will be set at the upcoming Central Economic Work Conference later this month. Our expectation is that Beijing will aim for an “appropriate” economic growth target of around 5% for next year.

(2) Looking ahead at economic releases next week, officials in Beijing appear to be generally in line with market expectations for a 5.7%, or perhaps even higher, year-on-year increase in industrial production in November from last month’s 4.6%. But we suspect the consensus forecasts as published by Bloomberg of a 12.5% year-on-year increase in November retail sales may be on the optimistic side.
Market Validation
Bloomberg 12/12/2023
China’s leaders started the annual closed-door Central Economic Work Conference on Monday to discuss economic targets and map out stimulus plans for 2024, Reuters reports, citing four people familiar with the matter.
• Meeting likely to end on Tuesday, Reuters adds
• Government advisers told Reuters they would recommend economic growth targets for 2024 ranging from 4.5% to 5.5%, with the majority favoring a target of around 5%

MT Newswires 12/15/2023
The value of China’s retail sales, the main barometer of consumption, rose 10.1% year over year in November to 4.25 trillion yuan, faster than the 7.6% jump in October, according to data from the National Bureau of Statistics on Friday.

The latest rate of expansion, however, fell short of the market’s forecast for a 12.5% increase, according to a Reuters poll.

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December 05, 2023
SGH Insight
With Governor Tiff Macklem having all but declared the peak in the Bank of Canada’s (BOC) hiking cycle, this week’s meeting will hold rates at 5% and likely pivot to conditional dovish language that suggests the central bank will ease rates early next year.
The Bank’s efforts now are focused on trying to maintain a “higher for longer” policy strategy that extends through the turn of the year before it shifts to signaling rate cuts.
For this week’s meeting, BOC staff have likely crafted language options for the post meeting statement that acknowledge the aggressive campaign of higher rates are working even as the central bank reiterates its resolve to seeing inflation back to target.
Though this meeting’s message will continue to reiterate the central bank’s willingness to raise rates again “if high inflation persists,” the Bank will note that it is patient in looking for additional confirmation that tells it the inflation job is done.
Market Validation
Bloomberg 12/6/23
The Bank of Canada held interest rates steady for a third consecutive meeting, acknowledging a stalled economy while keeping the door open to further hikes as they watch for more progress on slowing inflation.
Policymakers led by Governor Tiff Macklem left the benchmark overnight rate unchanged at 5% on Wednesday, the highest level in 22 years. The pause was expected by markets and by economists in a Bloomberg survey.
Officials say recent data suggest the economy is no longer in “excess demand” and their hiking campaign is dampening spending and price pressures. They eliminated a line from the October decision that said inflationary risks have increased, but said they’re prepared to raise borrowing costs again if necessary.
“Governing council is still concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” the bank said, adding that they want to see “further and sustained easing in core inflation.”
The more neutral language in the statement suggests policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, officials will want to see more progress on core inflation, which strips out the effect of more volatile items, before declaring victory.
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December 04, 2023
SGH Insight
Monday Morning Notes, 12/4/23
If You Don’t Have Time This Morning
The Fed is on a path to a March rate cut. All the pieces are there, the Fed just needs to put them together. It’s a long way off, and I have high confidence the data will unfold in a way that allows for the Fed to cut by then. I don’t know easing at the March meeting will be sufficient to stave off a hard landing; real rates are very high if, as it appears, inflation has come down faster than the Fed expected. I am beginning to suspect that the anecdotal labor market reports tell us that a soft-landing requires the Fed to cut rates by January, but for now I think the Fed needs to see some hard-landing type of data to pull the cut into January.
Recent Data and Events
The PCE inflation numbers were last week’s data highlight.

For all intents and purposes, the Fed has restored price stability. There may be some bumps in the road over the next few months, but they won’t change the underlying story now that it looks like the third quarter growth surge didn’t have legs. If inflation is tracking close to 2% in the last half of 2023, it will be below 2% in the last half of 2024 if the Fed holds policy rates at current levels much longer.

Market Validation
WSJ -12/13/2023

By: Nick Timiraos


Based on the Nov CPI and PPI, headline PCE inflation likely declined last month. Core PCE inflation is projected to have been a very mild 0.06% in Nov. This could lower the 12-month core PCE index to 3.1%. The 6-month annualized rate would fall to 1.9%, below the Fed's target.

Bloomberg 12/13/2023

By: Matthew B


This turned out to be the story of Q4. All of the categories in today's PPI data that flow into the Fed's preferred PCE metric came in really soft. Per
, after today's report, "Q4/Q4 core PCE will likely print 3.3% versus the Fed's September projection of 3.7%"
Read Full Report
November 27, 2023
SGH Insight
Upcoming Data and Events

We get a steady stream of data this week but note that the November employment report won’t arrive until next week.

Monday we get new home sales for October, with the number expected to be weaker than November as buyers delayed purchases due to high mortgage rates.

...Track Waller’s evolution of his thinking on the economy and implications for monetary policy. He said this ahead of the November FOMC meeting:
What does that mean for monetary policy? I will be looking carefully at the data to see whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up. As of today, it is too soon to tell. Consequently, I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate. Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work. But if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run up in longer term rates.
Waller can build on this and simply say that data since this speech indicated a cooler economy with lower-than-expected inflation, validating the Fed’s decision to stay on hold in November and to remain on hold (watch and wait) in December. He will likely continue to couch his outlook as a debate about the need for another rate hike and not say that rates are “sufficiently restrictive.” Obviously, it would be a dovish surprise if he couches his outlook in terms of “how long to hold rates at this level.”

...Waller will need to tread carefully around the issue of financial conditions. I suspect he thinks any further easing is premature, but also would say that conditions have tightened since the Fed’s last rate hike, implying that the easing since the November meeting still leaves conditions restrictive. As a hawkish surprise, Waller could say the recent easing lowers the bar for another rate hike, something some market participants believe. I suspect this would be counterproductive given recent data, but if he wants to go that direction, then market participants will likely push long yields back up to 5% and will bring back that 8% mortgage rate Powell clearly didn’t like.

Market Validation
Bloomberg 11/29/23
• Forecast range 680k-773k from 50 estimates, median 721k
• New home sales fell 40k in Oct. from prior month, the Census Bureau said

...Governor Christopher J. Waller 11/27/23
At the American Enterprise Institute, Washington, D.C.
I am encouraged by what we have learned in the past few weeks—something appears to be giving, and it's the pace of the economy. Data for October indicated an easing in economic activity, and forecasts for the fourth quarter show the kind of moderation that is more in keeping with progress on lowering inflation. In addition, after watching core PCE inflation increase in September from its summer lows, the latest data showed inflation moving in the right direction in October, albeit gradually.
While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained. But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. Hopefully, the data we receive over the next couple of months will help answer that question.

...Governor Christopher J. Waller 11/27/23
At the American Enterprise Institute, Washington, D.C.

There has also been a lot of discussion about the overall easing of financial conditions this month, as reflected in market interest rates and the prices of other assets. To put this easing into perspective, from July to the end of October, the yield on the ten-year Treasury increased about 1 percentage point. Since the FOMC's last meeting, which ended November 1, the ten-year rate has fallen six tenths of a percentage point. Long-term interest rates are still higher than they were before the middle of the year, and overall financial conditions are tighter, which should be putting downward pressure on household and business spending. But the recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job.

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November 21, 2023
SGH Insight
We will know in the coming days how Berlin intends to handle the fallout, but suspending the constitutional debt brake for another year or two appears to be shaping up as the best option for all as things now stand. Indeed, sources close to Lindner, from within his FDP party, are acknowledging that a suspension of the debt brake may be the only solution here. One idea is to suspend the brake for 2023 only, instead of for two years, which would secure the 60 billion euros for now but effectively punt the larger problem to 2024.
A decision is likely this week possibly by or at a cabinet meeting scheduled for Thursday.
Market Validation
Bloomberg 11/22/23
The coalition can suspend the debt brake rule with its
majority in the lower house of parliament, though it would also
be potentially exposing itself to another legal challenge.
In what may have been the first hint of an imminent
climbdown, one of Lindner’s economic advisers was quoted as
saying Tuesday that a retroactive emergency suspension of the
debt brake for 2023 would be justifiable.

Bloomberg 11/28/23

German Chancellor Olaf Scholz’s government approved a supplementary 2023 budget that includes the suspension of rules limiting net new borrowing for a fourth consecutive year.
Scholz’s coalition was forced into lifting the so-called debt brake again after a ruling this month by the nation’s top court meant that tens of billions of euros of debt in special funds would have to be accounted for in the regular federal budget.
While it doesn’t mean that Germany is adding to its debt burden, it lifts the figure for net borrowing for this year by €25 billion ($27.4 billion) to €70.6 billion, according to the Finance Ministry. In the original 2023 plan approved at the end of last year, it was €45.6 billion.

Read Full Report
November 20, 2023
SGH Insight
Published on November 20, 2023
Monday Morning Notes, 11/20/23
The Fed releases the minutes of the November FOMC meeting on Tuesday. We expect the tone of the minutes will reflect further gradual shifting toward “sufficiently restrictive,” but think the minutes will fall short of declaring that July was definitively the last rate hike. We are looking to see if participants generally agreed that rates were “probably significantly restrictive” and risks “more broadly balanced” as signals of a more dovish policy direction. We think it remains too early for the Fed to declare that this cycle’s pause began back in July because the Fed knows that with such a declaration, markets will pull forward expectations of a rate cut. The Fed won’t make such a move until it has more confidence that it is closer to a rate hike.

...Better-than-expected inflation numbers drove market pricing last week. Market participants prepared for an upside miss to the consensus expectations of 0.3% core CPI inflation; the whisper number was 0.4%. Instead, core inflation printed at 0.2% and was subsequently followed by soft PPI numbers. Combined, expectations are the core-PCE will come in below 0.2% for March and help ensure that 2023 inflation will come in well below the Fed’s September forecast of 3.8%.

Market Validation
FOMC minutes 11/21/23
(1)Participants' Views on Current Conditions and the Economic Outlook
Participants noted that real GDP had expanded at an unexpectedly strong pace in the third quarter, boosted by a surge in consumer spending. Nevertheless, participants judged that aggregate demand and aggregate supply continued to come into better balance, as a result of the current restrictive stance of monetary policy and the continued normalization of aggregate supply conditions. Participants assessed that while labor market conditions remained tight, they had eased since earlier in the year, partly as a result of recent increases in labor supply. Participants judged that the current stance of monetary policy was restrictive and was putting downward pressure on economic activity and inflation. In addition, they noted that financial conditions had tightened significantly in recent months.

(2) Participants expected that the data arriving in coming months would help clarify the extent to which the disinflation process was continuing, aggregate demand was moderating in the face of tighter financial and credit conditions, and labor markets were reaching a better balance between demand and supply.

(3) Participants discussed several risk-management considerations that could bear on future policy decisions. Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two sided.

...Bloomberg Economics 11/30/23
OUR TAKE: The October personal income and spending report shows why FOMC members are increasingly confident that rates are sufficiently restrictive. With softening income growth and some help from falling energy prices, the PCE deflator — the Fed’s preferred metric for assessing progress on its inflation mandate — is on track to come in lower than the median FOMC member’s forecast for end-2023. The momentum is for disinflation to continue through at least mid-2024, when core PCE inflation likely will fall below 3%.
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November 13, 2023
SGH Insight
Published on November 13, 2023
According to sources accompanying Xi on his trip, the Chinese leader said his talks with President Biden will be mainly to show the world that the two countries can manage their differences and avoid and prevent misunderstandings or fierce competition from veering into confrontation or conflict. China, he said, cannot expect economic and trade relations with the US to get back on track overnight, but the talks will inject confidence into the market if relations do not get worse.

In the run up to the summit, the Biden administration has laid out its top agenda items extensively in the media; foremost of which is a resumption of the military-to-military contacts between China and the US which Beijing cut off after the visit by then Speaker of the House Nancy Pelosi to Taiwan in August of 2022.
It is also notable that the White House has elevated to the top of its agenda the export from China of the precursor chemicals used to synthesize the deadly opioid fentanyl, which has led to the mass poisoning of around 250,000 Americans since Biden took office three years ago. It will come as no surprise that China’s exports of fentanyl precursors are not on the list of Xi Jinping’s top agenda items.
According to officials from China’s security apparatus, the most important topics for Xi will be overall US-China relations, bilateral military relations, Taiwan, the South China Sea, the Israeli-Palestinian conflict, and Ukraine.
As to economic matters, there is little to no expectation from any side of a major change to the issues important to either party, and Xi has indicated that he will not engage in these at any length.
Market Validation
Bloomberg 11/16/23
Presidents Joe Biden and Xi Jinping emerged
from their first meeting in a year betting that a handful of
small victories will arrest a surge in US-China tensions that
has unnerved neighboring nations and threatened global economic
Expectations were low owing to deep-seated differences over
trade, Taiwan and human rights, and even the summit’s modest
accomplishments were hard-won. Those included deals to try to
address the fentanyl crisis and to restore military
communications severed after then-House Speaker Nancy Pelosi
visited Taiwan last year.
In a sign of how much remains to be done, there was no
evidence of progress on bigger issues like US curbs on microchip
exports, tariffs or tensions in the South China Sea, where
Chinese and US ships and planes have had a series of provocative
Read Full Report
November 08, 2023
SGH Insight
European Union finance ministers are slowly getting closer to an agreement on revisions to the Stability and Growth Pact (SGP) rules that govern member states’ fiscal budgets.

They will meet tomorrow (Thursday) to discuss how they feel about the latest "landing zone" - a proposal that narrows rather than solves all the differences between the EU north and south.

There seems to be agreement on the point however, that the overall focus of the new rules should be on net expenditure growth, as a single operational indicator that is completely in the hands of the government, and which would be set annually to make possible the agreed debt reduction path.

There is also agreement that defense spending should be a "relevant factor" for the Commission when it decides whether to start disciplinary steps against a government for breaching the 3% deficit limit – in effect if the excess is for military spending, the Commission will let it slide.

The deal that the EU wants to reach on the new fiscal rules this year will be among governments only. It is only expected in December since despite some overall progress, which both fiscal hawks and doves acknowledge, there is still a long way to go.
Market Validation
Bloomberg 11/9/2023
Le Maire said it was essential to have an agreement by the
end of the year, saying the “whole credibility of the EU is at
“We are working very hard with Christian and the German
team,” Le Maire said. “We are making progress. The mood is an
excellent one. We are moving in the right direction.”
Lindner, speaking shortly after the French minister, said
substantial progress has been made and that he’s more optimistic
about achieving a political agreement this year, though he added
that much more work is needed.
“A Franco-German initiative could lead to a mutual
understanding among all member states,” he said. “Now it’s about
numbers, not only instruments.”
Read Full Report
November 06, 2023
SGH Insight
...Monday Morning Notes, 11/6/23
With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.
The Fed will cut rates before inflation returns to 2%. Powell has already made this point clear, and it has long been in the SEP. The June SEP had 100bp of 2024 rate cuts with a year-end core inflation projection of 2.6%. Unless you believed that 100bp was going to all come in the fourth quarter, some of those rate cuts would come when inflation was above 2.6%. Still, doing so requires the Fed to see enough softness in the inflation numbers to be confident that inflation would remain on a path to price stability even with a rate cut.
Market Validation

...WSJ 11/28/23
Fed governor Chris Waller on rate cuts: "If you see this [lower] inflation continuing for several more months, I don't know how long that might be—3 months? 4 months? 5 months?—you could then start lowering the policy rate because inflation's lower.
Read Full Report
November 06, 2023
SGH Insight
Questions and Answers
SGH Insight
What will Governor Waller say Tuesday?
His topic is “using economic data to understand the economy,” which could lend itself to new insights into the path for policy but in practice Waller typically gives one economic update per inter-meeting period and that is usually closer to the blackout. Consequently, I think he will follow the message of his last speech or Powell’s press conference and not add any new insights during the Q&A. If anything, he could use this topic and the latest JOLTS and employment reports to take a victory lap as he correctly predicted that the Fed could take the heat off the labor market without mass layoffs. That would speak toward peak rates, but I suspect he would add the caveat that the Fed has been fooled by inflation before. That said, if I were him, I would feel pretty confident about the path of inflation.

...With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.
...With it increasingly clear that the Fed reached the peak of this cycle back in July, we can begin wargaming the first rate cut of the cycle. This isn’t any more about just setting policy to prevent the 2024 inflation forecast from rising. It’s about managing that while preventing the 2024 unemployment forecast from rising as well. Regardless of any Fed protestations otherwise, market participants will likely start pricing in a greater risk of a March cut on weaker economic data.
Market Validation
Bloomberg 11/8/2023
Federal Reserve Governor Christopher Waller said the US labor market is cooling this year without there being a big spike in unemployment as the economy has returned to a better balance between the supply and demand for workers.
“It’s slowing down,” Waller said in a speech in St. Louis. “We’re looking at the labor market, we’re seeing it normalized” and getting into “better balance between supply and demand.”
Waller made his comments following signs the labor market has shown of easing. Nonfarm payrolls increased by 150,000 last month following a downwardly revised 297,000 gain in September, a Bureau of Labor Statistics report showed Friday. The unemployment rate climbed to 3.9%, and monthly wage growth slowed.
The Fed governor pointed out that the ratio of job openings to the number of unemployed workers has come down in recent months.
“What we’ve seen since May ‘22, vacancies have kind of come down and the unemployment rate is still very, very low,” he said.

...MarketWatch 11/14/2023
Not only are traders seeing a higher likelihood of the
Federal Reserve cutting interest rates up to five times in 2024, they now
expect the first cut could arrive as soon as March, almost exactly two years
after the Fed started its most aggressive rate-hiking cycle since the 1980s.
According to CME Group's FedWatch tool, perceived chances of a rate cut from
the Fed arriving in March have risen to nearly 27%, up from 10.5% a day

Bloomberg 11/14/23
Treasury yields plunged Tuesday as a slower-
than-anticipated pace of consumer price growth last month
bolstered the view that the Federal Reserve’s most aggressive
interest-rate hiking cycle in decades is over.
The 10-year note’s yield fell as much as 19 basis points to
4.45, the lowest level since Sept 25. Meanwhile, the 30-year
bond’s yield fell 14 basis points to 4.65%. Swap contracts used
to hedge future Fed actions marked down the odds of another rate
increase to almost nil.

Read Full Report
November 02, 2023
SGH Insight
President Xi pointed out that China accounts for one-fourth of global foreign exchange reserves. As the country seeks to advance its financial market opening amid external turmoil, its key goal he said is to manage well such a large-scale reserve ensuring the security, liquidity, and appreciation of the reserve assets.
China will continue to reduce its holdings of US debt in its strategic objective to greater diversify its FX reserve assets, and to ensure FX market stability “amid a rising de-dollarization trend” in international trade. [NB – the movement for the redenomination of global trade away from dollars has been pushed aggressively by China for the last few years].
Market Validation
Bloomberg 12/20/2023
China’s holdings of US Treasuries fell in October for the seventh straight month, and now stand at the lowest level since April 2009.
• China’s stockpile — the largest foreign holdings behind Japan’s — fell by $8.5 billion to $769.6 billion, according to the latest figures from the Treasury Department, released on Tuesday.
o That was the lowest level since they stood at $763.5 billion in April 2009, according to data compiled by Bloomberg

Read Full Report
November 01, 2023
SGH Insight
The Fed held rates steady at the end of this week’s FOMC meeting as expected. While Powell left open the possibility of another hike, he made no effort to actually guide us toward expecting another rate hike this year. The Fed thinks it is done hiking rates for this cycle, and while it could still be wrong, the data that would convince it to hike again likely would not come in time for the December meeting.
Market Validation
Wall Street Journal 11/3/23

Hiring slowed sharply in October, a sign the economy is cooling this fall following a hot stretch over the summer.
U.S. employers added 150,000 jobs in October, down from the previous month's revised gain of 297,000, the Labor Department said Friday. That was the smallest gain since June, with automakers having around 33,000 fewer workers on payroll because of the United Auto Workers strike. The unemployment rate rose to 3.9% from 3.8% the prior month.
The figures could bring the Federal Reserve's historic interest-rate increases to an end by providing stronger evidence that higher borrowing costs have slowed the economy.
Read Full Report
October 31, 2023
SGH Insight
With little faith in the Bank of England’s (BOE) willingness to return UK inflation back to the 2% target before the economy slides into recession, markets are already speculating how soon next year the central bank will begin to cut rates.
The BOE, in part, is unintentionally fueling that speculation by indicating that it believes it might be done with rate hikes, which is likely to be reiterated when it holds rates steady again this week.
Market Validation
Bloomberg 11/2/23

The Bank of England left its benchmark lending
rate at a 15-year high, ruling out any possibility of letting up
on its fight against inflation for the foreseeable future.
Governor Andrew Bailey and his colleagues agreed that a
“restrictive” policy stance would be needed “for an extended
period of time” to curb Britain’s inflation rate, which remains
triple the target and the highest in the Group of Seven nations.
Read Full Report
October 29, 2023
SGH Insight
(1A) If You Don’t Have Time This Morning
The Fed will leave rates unchanged at this next meeting. Recent Fedspeak has been more aggressive than necessary to reinforce the expectation that rates will end the week unchanged and instead is more consistent with the Fed setting up for an extended pause. That said, we are going into the week with very low odds for a rate hike in December but it’s unlikely that Powell will close the door entirely on another rate hike

(1) The Federal Reserve will leave interest rates unchanged at this week’s FOMC meeting. This really isn’t in question at this point. At the September FOMC meeting, Powell signaled a likely pass at this next meeting while Fed speakers since have made no effort to push back on that expectation despite a steady flow of hawkish data.

(2) The Fed thinks, or maybe just hopes, it has likely finished hiking rates for this cycle. With policy rates now above inflation and a disinflationary trend in place, the current level of rates allows the Fed to move more cautiously. That also means policy is more resilient to stronger-than-expected data such as that seen in recent weeks. The Fed appears content to wait a few months to see if the economy remains on path to price stability before considering the need for another rate hike.

(3) Tighter financial conditions argue for additional patience on the part of the central bank. The Fed had been coming around to the idea that the policy rate was already high enough to restore price stability before the recent runup in longer-term yields further tightened financial conditions. While growth has been faster than the Fed expected, the Fed sees higher yields as the market working to counter that growth and substituting for additional rate hikes.

(4) Powell will not declare that the Fed has concluded with rate hikes for this cycle. Although the risks to the outlook are more balanced, with growth accelerating it must be the case that the risk to inflation is higher than the risk of recession, and that means there is scope for another rate hike. Moreover, the Fed won’t want financial conditions to ease too early, and one way to prevent that is to always dangle another rate hike in front of us.

(5 )It’s almost certain that journalists will be looking for some clarification on the dots. Governor Chris Waller raised the bar to another rate hike, arguing that if the economy evolves generally as expected in the SEP, he does not expect another rate hike will be necessary in contrast with the additional hike penciled in the SEP. If you can’t get the hawks on board with another rate hike, it isn’t happening. The dovish commentary overall from Fed speakers suggests that many of the 12 participants that anticipated another rate hike in this cycle have already erased that hike from their forecast.

Market Validation
(1A) FOMC press conference 11/1/23

The Committee decided a today's meeting to maintain the target range for Federal funds rate as 5.25 to 5.5 and continue the process of significantly reducing our securities holdings. We are committed to achieving a stance of monetary policy sufficiently restrictive to bring inflation sustainably down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. We are attentive to recent data showing the resilience of economic growth and demand for labor. Evidence of growth persistently above potential, or the tightness in the labor market is no longer easing, could put further progress on inflation at-risk and could warrant further tightening of monetary policy.

(1) Wall Street Journal 11/1/23

WASHINGTON -- The Federal Reserve held interest rates steady at a 22-year high but kept the door open to potentially raising them later to keep slowing inflation.
Officials described recent economic activity as strong and highlighted how a run-up in long-term interest rates could weigh on economic activity, according to a statement after their two-day meeting.

(2) Bloomberg 11/1/23
Federal Reserve Chair Jerome Powell said the US central bank is “proceeding carefully” with further tightening, given how far it’s come to date.
“Given how far we have come, along with the uncertainties and risks we face, the committee is proceeding carefully,” Powell said Wednesday during a press conference after the central bank’s latest two-day policy meeting.
“We will make decisions about the extent of additional policy firming, and how long policy will remain restrictive, based on the totality of the incoming data, the evolving outlook and the balance of risks,” he said, referring to the policy-setting Federal Open Market Committee.

(3) FOMC press conference 11/1/23

we are attentive to the increase in longer-term yields which have contributed to a tightening of broader financial conditions since the summer. As I mentioned, persistent change ifs broader financial conditions can have implications for the path of monetary policy. In this case the tighter financial conditions we are seeing from higher long-term rates and also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied. The first is the tighter conditions would need to be persistent. And that is something that remains to be seen. But that is critical. You know, things are fluctuating back-and-forth. That is not what we are looking for. With financial conditions we are looking for persistent changes that are material. The second thing is that the longer-term rates that have moved up, they can't simply be a reflection of expected policy moves from us that we would then, if we didn't follow through on them, then the rates would come back down. I would say on that, it does not appear that an expectation of higher near-term policy rates is causing the increase in longer-term rates.

(4) FOMC press conference 11/1/23
>> Mr. Chairman, I assumed there was a tightening bias in the economy. You look at the tightening stance policy to the extent you may need to additionally hike, but you didn't say earlier super sufficiently restrictive among forecast or rate hikes among most members of the Committee. But then you said you haven't made a determination. Would you say the bias right now is it is neutral, and the Committee has moved largely off of this forecast for two hikes -- I am sorry, one additional hike? >> CHAIRMAN POWELL: No, I wouldn't say that at all. I would say, the language looking at it here, in determining the extent of additional policy-firm that may be. >> CHAIRMAN POWELL: To return inflation to 2% over time, that is question we are asking. >> Is it right to think of that as a bias still in the Committee here? >> CHAIRMAN POWELL: We haven't used that term but it is fair to say that is the question we are asking, should we hike more. In September we wrote down one additional rate hike, but, you know, we will write down another forecast, as you know, in December

(F) >> CHAIRMAN POWELL: Let's talk about the dot plot first. The dot plot is a picture in time of what the people in the Committee think is in light of personal policy in light of their own personal economic forecast. In principle, when things change, that is not planned that anybody agreed to or we will do. That is a forecast that would change, for example. I mean, many things could change that would cause people to say I would not write down that dot six weeks later. Think of the number of things that could change your mind on that. I think the efficacy of the dot flat probably decays between the three month period between that meeting and the next meeting. But nonetheless it is out there. We personally update the forecast but we don't formally update the dot plot. So, we are trying to be transparent about how we think about these things.

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October 24, 2023
SGH Insight
With Canadian activity sliding and the Bank of Canada (BOC) winning its tenacious campaign to wrestle inflation back toward its 2% target, it can afford to hold its policy rate at 5% for the third straight month when it meets this week.

Indeed, Canadian GDP growth has declined for four straight quarters and markets already are starting to price in rate cuts from the second quarter next year.

Even with little or no growth projected in the fourth quarter of this year and a projection of annual growth slowing to below 1% next year, the BOC is likely to hold the line on rates.

The Bank has said while it is comforted with the direction of inflation, it remains concerned about price persistence and will hold rates steady.
Market Validation
Bloomberg 10/25/2023

The Bank of Canada kept interest rates unchanged for a second straight meeting, but left the door open to more tightening even as officials forecast weaker economic growth.

Policymakers led by Governor Tiff Macklem held the benchmark overnight lending rate at 5% on Wednesday, the highest level in 22 years. The pause was expected by markets and economists, and marks the fourth time officials sat on the sidelines this rate cycle, in which borrowing costs have jumped 475 basis points since March 2022.
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October 23, 2023
SGH Insight
Monday Morning Notes, 10/23/23
Third quarter GDP arrives on Thursday, and markets expect it to be a whopping 4.3%. Numbers on the high side will increase the probability that the Fed’s latest SEP projection is too low, and market participants will likely price in a greater probability of a December hike. See below why I think we should fade such a move.
The Fed is in a dramatically different place than a year ago. In retrospect, I think there was an unwritten strategy to keep raising interest rates until rates were higher than inflation and a disinflationary trend was established. Having reached that point, the Fed can now shift to an extended pause and wait to observe the progress toward price stability. In this phase of the cycle, policy is resilient to some elevated inflation prints.
Faster than expected growth in the second half of the year by itself does not push the Fed back into a rate hike at the December FOMC meeting.
Market Validation
Bloomberg 10/26/2023

The initial rise in Treasury yields in the aftermath of stronger-than-expected GDP and durable goods data was quickly erased, leaving yields down on the day, as futures jump to fresh session highs. Weekly initial jobless claims released at the same time came in slightly above estimate with small upward revision to prior week.
• On the day Treasury yields are down by 1b to 3bp across the curve; 2-year yields lower by 3bp on the day after initially jumping to cheapest levels in the immediate aftermath of the data
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October 20, 2023
SGH Insight
The political, market, and geopolitical news cycles have entered a new phase of enormous risk and volatility. But from a policy perspective, the upcoming meeting of the Governing Council of the European Central Bank on October 26 will be held in “calmer waters,” a phrase we have heard used more than once by ECB officials.
That does not mean traders and investors will have no interest in the meeting.
ECB officials will review the latest data against their forecasts at the two-day meeting next week. While inflation last month dropped more than markets had expected, and the next print is expected to show continued improvement, the numbers are, by and large, within expectations.
To that very important point, it appears some analysts are already straight lining this trend to a first half of 2024 ECB rate cut, some even calling for a cut in Q1. This flies against what the ECB expects it may do next year.
Market Validation

Bloomberg 10/26/2023

Any discussion of when to cut interest rates is “totally premature,” ECB President Christine Lagarde said at a news conference in Athens.
• ECB is currently in a holding pattern
• “So how long is sufficiently long? You know, obviously, we refer to timely manner sufficiently long, but in the same breath I say we shall be data dependent”
• “Now is not the time for forward guidance. Now is the time to really stick to our data dependency”
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October 18, 2023
SGH Insight
In the countdown to its October policy meeting, the potential for another adjustment in Yield Curve Control (YCC) is live as the Bank of Japan lays a path to an exit from negative rates policy that could come as soon as March or April next year.

While all that might sound a little early right now and we are mindful events can push decisions into later months, reasons for a more aggressive timeline, partly motivated by politics, are stacking up.
Market Validation
Bloomberg 10/31/2023

The Bank of Japan further loosened its grip on government bond yields while sticking with its position as the last global central bank to cling to a negative interest rate.
The BOJ said it will take a more flexible approach to controlling yields on 10-year government debt, saying the 1% level was now a reference point, according to its statement Tuesday. That marks a shift from a previous pledge of daily bond purchases at 1%, a stance that effectively drew a clear line in the sand there.

Bloomberg 10/23/2023

Bank of Japan officials are pondering the question of whether to tweak the settings of the yield-curve control program as domestic long-term interest rates float
higher in tandem with those in the US, the Nikkei newspaper reported on Sunday, without saying where it obtained the information. The topic will probably be discussed at the next two-day board meeting that ends Oct. 31, with some officials cautious about the idea as they continue to monitor wage trends, the
Nikkei said.
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October 18, 2023
SGH Insight
Raising the Bar

Bottom Line: The stage is being set to pass on another rate hike at the December meeting. Waller provided us with the conditionality around that meeting, and it raises the bar for a hike relative to the September SEP. Federal Reserve Chair Jerome Powell won’t close off a December hike, and could tomorrow repeat Waller’s guidance, but I think the risk here is that Powell can deflect from any real direction beyond November and appear a notch more hawkish that Waller. That would help solidify some market pricing of non-trivial but less than 50% odds of another rate hike in December.
Market Validation
Bloomberg 10/19/2023

Treasury futures push to fresh session highs across the curve in the aftermath of Fed Chair Powell’s prepared remarks to the Economic Club of New York, in which he says the central bank will be “proceeding carefully.” Fed-dated OIS trims around 2bp of hike premium from the December and January policy meetings.
• Front-end Treasury yields richer by 3bp-5bp, steepening the curve; 5s30s spread widens from around 4bp to 8bp
• US 10-year yields flip to little changed around 4.92%, unwinding early selloff
• Fed-dated OIS prices around 10bp of hike premium into the December meeting, down from 12bp priced Wednesday close, while January FOMC prices in around 13bp of hikes vs 15bp prior
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October 17, 2023
SGH Insight
The Data is Telling the Fed to Hike, But Doves Resist That Message

Bottom Line: At a certain level, this is all very simple. The economy has outperformed expectations and threatens to continue to outperform. The Fed does not expect it to continue to outperform, and a contingent within the Fed is fighting to make policy based on that forecast and forego further rate hikes. That contingent has yet to get significant pushback. We have key speakers coming up that can provide that pushback or suggest that rise in the long end of the curve is enough to complete the job. If that turns out to be a bad bet, then the Fed will eventually have to come back to the table with an additional hike, but in my opinion if that happens it will be more than one hike. I still think that yields can’t come down without sharply slower growth, and the evidence for that has been slow to emerge.
Market Validation
WSJ 10/18/2023

"This is a time where we just sit for a little bit. It may be for an extended
period; it may not. But let's see how things evolve over the next few months,"
said Harker, who has a vote on interest-rate policy this year.

WSJ 10/18/2023

"This is a time where we just sit for a little bit. It may be for an extended
period; it may not. But let's see how things evolve over the next few months,"
said Harker, who has a vote on interest-rate policy this year.

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